1. If you don’t have a summer reading list already, Blattman has one for you. The list is obviously not exhaustive, but two pressing titles I might add are Avner Greif’s Institutions and the Path to the Modern Economy and Gerschenkron’s Economic Backwardness in Historical Perspective.

2. In yet another not so nice chapter in the relationship between the Angolans and Congolese, Angola has deported thousands of Congolese. According to IRIN:

The expulsions are symptomatic of the tense relations between Luanda and Kinshasa, rooted in disputes over border demarcation and natural resources. Angola’s alleged loss of hundreds of millions of dollars in revenue due to the unauthorized artisanal exploitation of diamonds is a particular bone of contention.

3. Michelle Obama is in Africa on one of those first lady gigs. Many Africa watchers have complained that the visit does not have any real policy agenda beyond the usual talking points.

I agree.

But I would also like to point out that the failure of Africa to reap an Obama dividend is not just because of the State Dept.’s indifference to Africa but also because Africa lacks a coherent voice in Washington. Is there an Africa lobby? What does it do?

Instead of a calculated strategic response to the election of the first US president of African descent the Continent has swung from euphoria to disappointment over the fact that manna did not fall from heaven.

4. Lastly, the fortunes of the AU force in Somalia appear to be on an upswing. Now if only Somali politicians can get their act together and form a stable government.

The Economist has a piece outlining the paradox of Indian overseas development assistance (to the tune of 11 billion over the next 5-7 years). With figures from the CIA factbook I have calculated that about 300 million indians live below the poverty line. The Economist piece also touts the emergence of middle income donors, especially among the BRICs.

In this world Europeans and Americans no longer dominate aid. China is the biggest source of investment in Africa and the Gates Foundation is as important as many donor governments (and much more innovative). Private capital flows to Africa outstrip aid flows, contradicting an old justification that aid is necessary because investors hold back.

For the poorest, the new donors are more important because Western aid is shrivelling. Congress is proposing to chop American aid by a fifth. Brazil is giving more to the Somali famine than Germany, France and Italy combined. There are exceptions: Britain and Australia promise to boost aid spending. But they seem like a last hurrah of Western generosity.

Adding that:

In this new world the justification for aid and the behaviour of donors must change. For India and others, it is far from clear why the government should send aid abroad when it has so many poor people at home. No doubt, aid will be defended as a boost to global influence. The risk for India is that, just like the West did in the 1960s, it will pour money into grand projects which fail—and encourage bad government.

I disagree with this latter assessment. It is not aid per se that caused the epic governance problems facing most of the low-income countries of the world. Sure it stunted the co-evolution of accountable government and domestic revenue generation. But the biggest failure of aid was what it was spent on.

Aid being highly fungible meant that most of the money wound up in the private accounts of venal leaders and gun-runners.

Things have since changed a bit. For instance, China’s resources-for-infrastructure deals can be a model for Aid 2.0 (this no doubt needs some tweaking too, as this damaging expose on Sino-Angolan oil deals shows). Plus this time the infrastructure investments are different. In an earlier period most of the investments were overtly white elephant projects (like Moi’s infamous hydro-electric dam in Turkwel). Most of the current projects are in roads, telecoms, and to some extent agriculture – investments that will have a much bigger impact because of their broader reach.

You can find a related earlier post here.

The Portuguese once ruled an empire that included Brazil, Angola and Mozambique, among other smaller possessions. But since the loss of empire Lisbon has fared rather poorly. First it was the Brazilians who managed to economically dominate their former colonizers. The Angolans are beginning to also get in the game. Angola is one of the top three oil producers in Africa, and has the third largest economy in Sub-Saharan Africa.

The BBC reports:

Portugal’s prime minister is travelling to oil-rich Angola, which is boosting its investment in its former colonial power caught up in the eurozone debt crisis.

Angolan presidential aide Carlos Maria Feijo said Portugal’s privatisation scheme would be discussed. The International Monetary Fund has ordered Portugal to sell state companies to qualify for a bailout.

Angola’s investments in Portugal have risen sharply in recent years.

The figure in 2009 stood at $156m (£99m), compared to $2.1m in 2002, according to the Portuguese Institute of International Relations and Security (IPRIS), a Lisbon-based think-tank.

Angolan companies own the equivalent of 3.8% of companies listed on Portugal’s stock exchange, from banks to telecoms and energy, it says.

More on this here.

HT Louise Redvers

Back in 2000….

And now…

The latest issue of the Economist has “Africa” on the cover, with the pronouncement that the continent has, in the last ten years, moved from hopeless to hopeful.

Africa’s enthusiasm for technology is boosting growth. It has more than 600m mobile-phone users—more than America or Europe. Since roads are generally dreadful, advances in communications, with mobile banking and telephonic agro-info, have been a huge boon. Around a tenth of Africa’s land mass is covered by mobile-internet services—a higher proportion than in India. The health of many millions of Africans has also improved, thanks in part to the wider distribution of mosquito nets and the gradual easing of the ravages of HIV/AIDS. Skills are improving: productivity is growing by nearly 3% a year, compared with 2.3% in America.

All this is happening partly because Africa is at last getting a taste of peace and decent government. For three decades after African countries threw off their colonial shackles, not a single one (bar the Indian Ocean island of Mauritius) peacefully ousted a government or president at the ballot box. But since Benin set the mainland trend in 1991, it has happened more than 30 times—far more often than in the Arab world.

Population trends could enhance these promising developments. A bulge of better-educated young people of working age is entering the job market and birth rates are beginning to decline. As the proportion of working-age people to dependents rises, growth should get a boost. Asia enjoyed such a “demographic dividend”, which began three decades ago and is now tailing off. In Africa it is just starting.

More on this here.

Africa’s petrorulers (heads of state of Angola, Cameroon, Chad, Congo-Brazzaville, Equatorial Guinea, Gabon, Ghana, Nigeria, South Sudan, and Sudan) may be headed for tough times later this year. According to a piece by (Steve Levine) over at FP, Saudi Arabia – the world’s leading oil producer – is considering flooding the global oil markets with the aim of sticking it to the Russians and Iranians. Saudi action of this nature could lower prices to as low as US $40 a barrel from the current $83.27.

With the exception of Ghana and Cameroon, such a drop in oil prices would almost certainly lead to political unrest in the rest of Africa’s oil producers. Sudan and South Sudan are already facing huge revenue shortfalls due to a dispute over the sharing of oil revenue.

More on “The Coming Oil Crash” here.

I know it is increasingly becoming not kosher to put a damper on the Africa Rising narrative (these guys missed the memo, H/T Vanessa) but here is a much needed caution from Joe Stiglitz and Hamid Rashid, over at Project Syndicate, on SSA’s emerging appetite for private market debt (Africa needs US $90b for infrastructure; it can only raise $60 through taxes, FDI and concessional loans):

To the extent that this new lending is based on Africa’s strengthening economic fundamentals, the recent spate of sovereign-bond issues is a welcome sign. But here, as elsewhere, the record of private-sector credit assessments should leave one wary. So, are shortsighted financial markets, working with shortsighted governments, laying the groundwork for the world’s next debt crisis?

…….Evidence of either irrational exuberance or market expectations of a bailout is already mounting. How else can one explain Zambia’s ability to lock in a rate that was lower than the yield on a Spanish bond issue, even though Spain’s [which is not Uganda...] credit rating is four grades higher? Indeed, except for Namibia, all of these Sub-Saharan sovereign-bond issuers have “speculative” credit ratings, putting their issues in the “junk bond” category and signaling significant default risk.

The risks are real, especially when you consider the exposure to global commodity prices among the ten African countries that have floated bonds so far – Ghana, Gabon, the Democratic Republic of the Congo, Côte d’Ivoire, Senegal, Angola, Nigeria, Namibia, Zambia, and Tanzania.

In order to justify the exposure to the relatively higher risk and lending rates on the bond market (average debt period 11.2 years at 6.2% compared to 28.7 years at 1.6% for concessional loans) African governments must ensure prudent investment in sectors that will yield the biggest bang for the buck. And that also means having elaborate plans for specific projects with adequate consideration of the risks involved.

Here in Zambia (which is heavily dependent on Copper prices), the Finance Minister recently had to come out to defend how the country is using the $750 million it raised last year on the bond market (2013-14 budget here). Apparently there was no comprehensive plan for the cash so some of the money is still in the bank awaiting allocation to projects (It better be earning net positive real interest).

“They are fighting each other. By the time they have projects to finance, they will have earned quite a lot of interest from the Eurobond money they deposited. So, all the money is being used properly,” he [Finance Minister] said.

Following the initial success the country’s public sector plans to absorb another $4.5b in debt that will raise debt/GDP ratio from current ~25% to 30%. One hopes that there will be better (prior) planning this time round.

Indeed, last month FT had a story on growing fears over an Emerging (and Frontier) Markets bond bubble which had the following opening paragraph:

As far as financial follies go, tulip mania takes some beating. But future economic historians may look back at the time when investors financed a convention centre in Rwanda as the moment that the rush into emerging market bonds became frothy.

The piece also highlights the fact that the new rush to lend to African governments is not entirely driven by fundamentals – It is also a result of excess liquidity occasioned by ongoing quantitative easing in the wake of the Great Recession.

I remain optimistic about the incentive system that private borrowing will create for African governments (profit motive of creditors demands for sound macro management) and the potential for this to result in a nice virtuous cycle (if there is one thing I learned in Prof. Shiller’s class, it is the power of positive feedback in the markets).

But I also hope that when the big three “global” central banks start mopping up the cash they have been throwing around we won’t have a repeat of the 1980s, or worse, a cross between the 1980s (largely sovereign defaults) and the 1990s (largely private sector defaults) if the African private sector manages to get in on the action.

African governments, please proceed with caution.

This post originally appeared on the AfDB’s Integrating Africa Blog where yours truly is a regular contributor.

According to a recent survey by Ernst & Young, 44% of businesspeople in Africa identified inadequate infrastructure as one of the key constraints to doing business in the region.  This means that as Africa continues to grow in the next two decades, infrastructure development must top the investment agenda. General infrastructure development will be especially crucial as African economies undergo structural transformation from being primarily resource-driven to having bigger manufacturing and service sectors. Indeed Ernst & Young estimates that in 2012 43.1% of investments in capital in Africa went to manufacturing as opposed to 12% that went to the extractive sector. 

A key area that will require greater and smarter investment to fuel the region’s economic growth will be the energy sector. 

Everyone knows about the energy woes of many an African country – from Nigeria’s infamous generators to the total lack of functional national grids in some African states. A few countries have initiated plans to boost their energy sectors through investment in power generation (Ethiopia’s 6000MW Great Renaissance Dam on the Blue Nile), oil refining (Angola’s planned 200,000 bbl/day refinery in Lobito), and aggressive prospecting for fossil fuels (especially in eastern and southern Africa). Despite these national efforts, for African states to ensure energy security for their growing economies, they must also think regional (and to some extent continental) when developing their respective energy sectors. As intra-Africa trade grows in the next two decades, there will be pressure to integrate energy markets as well. 

The reasons for a regional/continental approach to energy sector development are twofold. Firstly, investment outlays in energy infrastructure development are often prohibitively expensive (because their viability relies on economies of scale), thus necessitating the pooling of resources. Ethiopia’s newest dam, for instance, will cost $4.7 billion. Not many African countries can afford such massive investments on one project. 

Secondly, there is the issue of markets. With 12% of the world’s population, Africa consumes a meager 3% of the world’s electricity. Of this 75% takes place in North Africa (33%) and South Africa (45%). The remainder is shared out among the rest of Sub-Saharan African states. Furthermore, electricity connectivity on the continent remains relatively low, with rates averaging 43% (North Africa stands at 99%, with the other sub-regions between 12-44%).

This means that for projects like Ethiopia’s to make sense, access to international markets must be guaranteed. A key part of the Ethiopian project is the planned interconnector line linking the power station to the Kenyan grid. Joint investment and taking advantage of economies of scale will also help lower the cost of power in Africa. At present the average tariff per kilowatt-hour in the region is US $0.14, compared to US $0.04 in Southeast Asia. It is estimated that investing in regional grids and hydropower will save the region up to $2 billion annually. This is music to the ears of sugar millers, cement manufacturers and many small factory owners across the continent. 

Existing and Planned Power Pool Connections in Africa

Source: Niyimbona, P, UN Economic Commission for Africa; Note: There are additional planned lines connecting Ethiopia to Sudan and Kenya, respectively, not shown on the map.

With this in mind, African states have begun the process of integrating their power sector infrastructure, via regional power pools (see map above of existing and planned power interconnector links). The South African Power Pool (SAPP, established in 1995); North African power pool (COMELEC , 1998); West African Power Pool (WAPP, 2000); the Central African Power Pool (CEAPP, 2003); and the East Africa Power Pool (EAPP, 2005) are all initiatives to establish regional power markets and help harmonize energy policy. 

The COMELEC sub-region (27.4 GW, largely thermal, in 2009) has the highest connectivity and the best infrastructure. The region is also linked to the Middle East via the Egypt-Jordan interconnector line and Europe via the Morocco-Spain line (part of the future Mediterranean Electricity Ring, MEDRING). SAPP, with a capacity of 50GW (78.4% coal; 20.1% hydro; 4% nuclear and 1.6% diesel), is next in terms of infrastructure development.  The remaining pools have 13 GW in the WAPP; 29 GW in the EAPP. There is a plan to link the EAPP to states outside of East Africa as part of COMESA. The 19-state COMESA bloc has an installed capacity of 52MW (69% thermal and 30% hydro) and has since 2009 initiated a process to harmonize regulation and energy policy.   In terms of regional (intra-power pool) trade in power, SAPP is ahead with 7.5%, WAPP 6.9%, NAPP 6.2%, EAPP 0.4% and CAPP 0.2%.  Clearly, there is a lot of room for improvement in levels intra-pool trade in power. 

All these developments are encouraging. But a lot more needs to be done. For starters African states must work harder to harmonize their energy policies. This will necessarily involve greater liberalization of their power sectors, especially with regard to power generation and distribution. There is also an urgent need to invest in interconnector infrastructure to ensure that power can be transmitted efficiently to market. In the Day Ahead Market (DAM) of SAPP, for instance, trading is limited by between 40-50% of the potential level due to lack of efficient transmission capacity. Lastly, there will be a need to connect the regional power pools. This will reduce their overreliance on regional “anchor” economies (the best example of this is SAPP’s overreliance on ESKOM of South Africa, which has its own integrated resource plan). It will also create even bigger markets, including potentially the Middle East and Europe.  

Ultimately, whether or not the dream of regional and continental power interconnectivity is achieved will depend on politics. Unfortunately, so far things do not look good. Almost a decade after the idea of regional power pools set in, governments are yet to harmonize their power sector regulatory policies. In many countries state monopolies dominate, with attendant inefficiencies. And across the continent power supply master plans are still very nation-centric and under the tight control of local vested interests. Moving forward, the challenge will be to convince governments and stakeholders (private sector and consumers alike) of the benefits of having an Africa-wide power market – which will necessarily require the liberalization of national power sectors. The alternative will be more roundtable discussions and promises of policy harmonization that never get fulfilled. 

It is a commonly accepted idea in IR theory that states have the habit of externalizing their domestic institutions [and accompanying economic and political systems] in their engagements within the international system (See Katzenstein, 1976 [pdf, gated]) – think democracy promotion, Reagan-Thatcherist free market evangelism, or Sino-Russian coziness with states that have an authoritarian bend. 

This phenomenon has non-trivial implications for development assistance. For instance, poor countries receiving capacity development assistance from say a Scandinavian liberal democracy often need to also adopt related practices beyond the narrow specific field (say tax reform) that is being addressed by the capacity development program. Many projects fail to produce the desired results because of this. Indeed past research has shown that “though aid [from wealthier, mostly Western democracies] does not affect quality of life in the aggregate, it is effective when combined with democracy, and ineffective (and possibly harmful) in autocracies.” [Kosack, 2003- pdf]

So does the effect of Chinese aid/finance to poorer countries follow this pattern? In other words, does the institutional incongruence effect also hold for autocratic donors? 

The folks at Aid Data blog think it does: 

…… we estimate the relationship between Chinese development finance and human development in democratic and autocratic recipient countries. Our results show a negative relationship between Chinese development finance and human development in democratic countries. Interestingly, these results also suggest that Chinese development finance can successfully promote HDI growth for autocratic recipients. Kosack found the opposite pattern in his study of Western aid.

The findings are preliminary and may not withstand robustness checks, but all the same interesting.

More on this here.

Also, check out the Economist for a neat analysis of the potential impact of a Chinese economic slowdown on African economies.

On January 15^th 2014 President Yoweri Museveni finally admitted that Uganda People’s Defence Force troops are engaging in combat operations within South Sudan. Right after the political fallout in Juba and escalation of hostilities between forces loyal to President Salva Kiir and those behind his former deputy Riek Machar, Mr. Museveni threatened Machar with military action if he did not come to the table to negotiate with Kiir. Museveni’s military involvement in the conflict has caused concern in Nairobi and other capitals in the region. For one, Uganda’s military intervention in the conflict may yet jeopardize the ceasefire agreement that was signed on January 23, 2014 in Addis Ababa. The regional body IGAD (Intergovernmental Authority on Development) is supposed to be a neutral arbiter and monitor in the conflict. Museveni’s clear leanings towards the government in Juba may bring to question IGAD’s neutrality in the mediation effort.

For historical reasons (see below) Khartoum fears Kampala’s military involvement in South Sudan. But this time the situation is slightly different, and a little more complex. Bashir has already shown his hand in support of Juba against Machar, possibly for two reasons: (i) Khartoum needs Juba’s help in weakening the rebellion by the rump SPLA (SPLA-North) that is still active in Blue Nile and South Kordofan, regions that border South Sudan; and (ii) Bashir needs to keep the oil flowing in order to ward off internal turmoil within Sudan due to rapidly deteriorating economic conditions (see here). Kiir’s willingness to throw SPLA-N under the bus comes as no surprise since it is an offshoot of the “Garang Boys” (mostly PhDs) who occupied a special place, unlike Kiir and others, in John Garang’s SPLA. SPLM-N’s leader Malik Aggar, shared Garang’s vision of one united reformed Sudan, as opposed to secession by the South. At the same time, however, Khartoum does not want a super strong South Sudan free of rebels. Total cessation of conflict in South Sudan would rob Khartoum of proxies to keep Juba in check. Uganda’s involvement could tip the balance in Juba’s favor vis-à-vis potential Bashir allies.

Meanwhile in Nairobi and Addis Ababa concern is growing over Uganda’s claim that the IGAD should foot the bill of UPDF’s adventures in South Sudan. Both Ethiopia and Kenya prefer settling the conflict at the negotiating table, partly because both have their security forces stretched by domestic armed groups and bandits and the war in Somalia. Kenya has said categorically that it will not send troops to South Sudan, even under IGAD. The wariness in Nairobi and Addis to send troops or cash for a military cause in South Sudan contrasts sharply with Kampala’s choice of military action from the moment the current flare up started in Juba. This despite the fact that Uganda also has troops serving in Somalia.

Which raises the question: What explains Uganda’s international military adventurism under Museveni? The answer lies in the confluence of history, international geopolitics, and Uganda’s internal politics.

Uganda is one of the more militarized states in Africa, with the military having direct representation in parliament (10 seats). It is also interventionist, with a history of combat engagement and support for rebel groups in six neighboring states – Burundi, the Central African Republic (CAR), the Democratic Republic of Congo (DRC), Rwanda, Somalia, and South Sudan. More recently, the nation has been a key advocate for greater integration within the East African Community (EAC). Indeed, Ugandan President Yoweri Museveni fancies himself as a possible head of an EAC political federation should it ever materialize. Uganda is also a key player in the African Capacity for Immediate Response to Crises (ACIRC), a proposed standby force with capacity to rapidly deploy troops to trouble spots in Africa (other key supporters include South Africa, Chad, and Tanzania).

Museveni and his kadogo (little) soldiers

Once in power, Museveni styled himself as the guarantor of peace and stability in Uganda. Many (both at home and abroad) evaluated his performance relative to the disastrous years under Amin and the ensuing civil war. The resulting peace dividend (albeit restricted to the south of the country) was marked by relative macro-economic stability, with growth averaging about 6% for much of the 1990s. This made Museveni a darling of Western donors and international financial institutions. However, Museveni’s record with regard to democracy and human rights remained dubious. This put him in awkward position vis-à-vis the West, especially since the 1990s was the zenith of Western promotion of liberal democracy.

To this Museveni reacted cleverly, and worked hard to position Uganda as a strategic player in the wider region’s geopolitics. In order to maintain his international stature and secure his position domestically, Museveni labored to bolster Uganda’s relevance to the West.

Museveni enters Kampala (Source)

Beginning in the early 1990s, Uganda got militarily involved in a number of neighboring states. Support for Garang’s SPLA drew the ire of Khartoum, which in turn supported the Lord’s Resistance Army (LRA) in northern Uganda. Subsequently, the Ugandan military conducted raids against LRA bases in Sudan while also offering combat assistance to the SPLA. For instance, the 1997 battle at Yei featured Ugandan soldiers alongside the SPLA against the Sudan Armed Forces (SAF). It is around this time that the seed was planted for future military involvement abroad at the turn of the century (this time in Somalia under the Western-funded AU mission, AMISOM, to help stabilize the country). After US President Bill Clinton designated Sudan as a state sponsor of terror, Uganda positioned itself as an ally in the frontline of “Global War on Terror.” Kampala served as an intermediary for US aid to SPLA, thereby further strengthening US-Uganda military ties. It is telling that in 2003 Uganda was among only a handful of African states that supported the US-led Iraq War. About 20,000 Ugandans worked in US military bases in Iraq (this was also an excellent job creation tool; and a way of earning Forex).

So far Uganda’s most complex military adventure was in the Democratic Republic of Congo (DRC). A mix of strategic geopolitical positioning, the need to secure markets for Ugandan goods, private greed and domestic politics drove Uganda’s invasion of the DRC. The first Congo War (1996-97) was swift, aimed at helping Laurent Kabila oust Mobutu Seseseko (Rwanda and Angola also helped). Soon after Uganda and Rwanda fell out with Kabila, occasioning the Second Congo war (1998-2003), which involved four other African states. It is then that the façade of intervention for regional stability completely broke down. Ugandan and Rwandan commanders exploited existing and new cross-border smuggling and semi-legitimate trade networks to orchestrate massive pillaging of natural resources in eastern DRC (Competition between the two militaries later intensified, resulting in the “Kisangani Wars.”)

For instance, in the year 2000 despite only producing 0.00441 tonnes of gold, Uganda exported 11 tonnes. A UN report indicates that well-connected generals (including Museveni’s half-brother) created entities headquartered in Kampala to facilitate the illicit trade. It’s important to note that Museveni’s tolerance of the semi-autonomous activities by his generals was strategic (it generated revenue through Kampala-based entities and kept the generals happy) and did not lead to fracturing within the military. Indeed, many of those involved were later promoted.

Museveni meets Somali President, Shayk Sharif Ahmed in Mogadishu in 2010

 

The above account explains Museveni’s efforts in the recent past to build an image as the regional powerbroker: heading peace talks between the DRC, Rwanda and eastern DRC rebels; intervening in Somalia to prop up the government in Mogadishu; and in the latest episode siding militarily with President Salva Kiir in South Sudan’s domestic political cum military conflict. Domestically, Museveni’s grip on power is as strong as ever. Recent reshuffles in the military removed powerful Historicals (the original “bush war heroes”) thereby leaving Museveni (and his son) firmly in control of Uganda’s armed forces. There is no end in sight for Uganda’s international military adventurism.

In many ways Uganda’s international adventurism has been a case of agency in tight corners. The country is a landlocked; has neighbors with sparsely governed borderlands that provide rear-bases for Ugandan armed groups; and Kampala needs Western aid to maintain the regime, a situation that necessitates acts of geopolitical positioning – especially with regard to the “Global War on Terror” and maintenance of regional peace and stability. Furthermore, oil discovery along the conflict-prone DRC border on Lake Albert and the need for pipelines to the sea to export Ugandan oil will necessitate even greater regional involvement. So while Uganda’s present outward adventurism is primarily because of Museveni’s peculiar personal history, it is correct to say that even after Museveni (still far into the future) the country will continue to be forced to look beyond its borders for economic opportunities, security, and regional stature.

Yesterday Nigeria unveiled new GDP figures following the rebasing that catapulted the country of 170 million to become Africa’s biggest economy (GDP US$509b). Below is the ranking of the top sixteen economies in SSA. Mineral economies (10/16) still predominate (Source: The Economist).

Here is Izabella Kaminska of the FT:

Source: Financial Times

On the surface, Nigeria’s oil sector has dropped in significance to a mere 13% of real GDP, while the services sector has climbed to 40% in real terms. Yet, the reality is that it is the country’s oil revenues that have supported growth and, to a large extent, maintained social order. Without oil, both would fall apart; government spending would be much smaller, interest rates much higher, and the currency’s valuation much lower.

….. the country’s domestic savings rate, at a measly 20 per cent of GDP, is extremely low for a developing economy at this stage. A key reason being the government’s inability to tame chronically high inflation, meaning bank deposits have earned negative real interest rates for most of the past decade.

More on this here (HT Tyler Cowen).

And by the way, on this score Nigeria is not alone.

In an instance of the triumph of hope over experience The Economist recently pronounced the end of the resource curse in Africa. I do not completely buy their argument. Yes, growth and investment across the Continent may no longer be tightly coupled with natural resource cycles. But from Ghana, to Zambia, macro-economic stability (and important aspects of social spending) are still very tightly tied to movements in the global commodity markets.

Furthermore, many of these countries have recently re-entered the global debt markets partly backed by primary commodities as surety. The same applies to debts owed to Beijing. Last year alone foreign debt issues in the region exceeded $6.5b. As I argued in June of 2013, we might be entering another pre-1980s debt bubble.

Tanking crude prices have put Angola on the ropes. The country recently slashed $14b of previously planned spending. The Cedi and Kwacha took a nosedive (26% and 13%, respectively) last year because of sagging commodity prices (gold and copper) and government deficits (fueled by the expectation of future commodity bonanzas, especially in the case of Ghana whose debt to GDP ratio is now a staggering 65%). Even well-balanced Kenya (also a recent eurobond issuer) has had to go to the IMF for a precautionary loan against currency-related shocks in the near future. The current situation has prompted ODI to warn that:

The exchange-rate risk of sovereign bonds sold by sub-Saharan African governments between 2013 and 2014 threatens losses of $10.8 billion, equivalent to 1.1 percent of the region’s gross domestic product, the ODI said. While Eurobonds are typically issued and repaid in dollars, the depreciation of local currencies in 2014 makes it harder for governments to repay them.

All this brings to the fore SSA’s biggest challenge over the next two decades: How to carry out massive investments in infrastructure and human capital, while at the same time maintaining a sustainably balanced macro environment that is conducive to long-term saving.

Only 9 out of 54 African countries are represented on the 2014 Forbes billionaires list. There are certainly more than 29 dollar billionaires on the Continent (most of the rest being in politics). Let’s consider this list as representative of countries in which (for whatever reason) it is politically safe to be publicly super wealthy – which in and of itself says a lot about how far Nigeria has come.

Source: Forbes

Some will look at the list and scream inequality. I look at the list and see the proliferation of centres of economic and political power. And a potential source of much-needed intra-elite accountability in African politics. For more on this read Leonardo Arriola’s excellent book on the role of private capital in African politics.

See also this FT story on the impact of currency movements on the wealth of Nigeria’s super rich. Forbes also has a great profile of Aliko Dangote, Africa’s richest man.

The FT reports:

For Africa’s non-oil exporters, the collapse in crude prices has provided a cushion. But, with many African countries import-dependent, the depreciation of currencies affects inflation and the cost of imports. It will also put a strain on those nations that have taken advantage of investors’ search for yields to tap into international capital markets.

The likes of Zambia, Ethiopia, Rwanda, Kenya, Ghana, Senegal, and Ivory Coast have all issued foreign currency dominated sovereign bonds in recent years. “In the past, foreign exchange weakness in Africa was largely shrugged off. Economies adapted and found a way to cope with it, but the recent surge in eurobond issuance has been a game-changer,” says Razia Khan, chief economist for Africa at Standard Chartered.

“Now, when currencies depreciate, external risks are magnified, public debt ratios rise, and perceptions of sovereign creditworthiness alter quite dramatically.”

Prof. Deborah Brautigam of SAIS sees the following happening:

• Prices for African commodities will worsen, then improve. In recent years, China’s slower growth has pushed down prices for gold, crude oil, copper, platinum and iron ore. South Africa’s mining sector was expected to lose over 10,000 jobs due to lower demand
• Africa will import even more from China. Cheaper Chinese exports will please African consumers while putting Africa’s manufacturers at a further disadvantage. There will be more pressure for tariff protections
• [L]ow wages in Ethiopia and elsewhere had been attracting significant factory investment from China. With costs now relatively lower in China, the push to relocate factories overseas will slow. This will save Chinese jobs, but postpones Africa’s own structural transformation.

And concludes that:

In the short term it is hard to see how this devaluation can help Africa, notably its productive and export sectors.

The thing to note is that different African countries have different kinds of exposure to China. The commodity exporters (both petroleum and metals) will be hit hard. The effects will be somewhat attenuated in countries exposed primarily through Chinese FDI and infrastructure loans. Domestic fiscal reorganization and resources from the AfDB and other partners should plug a fair bit of the hole left by declining Chinese investments (although certainly nowhere near all of it). And with regard to sovereign debt, a Chinese downturn might persuade the US Central Bank to delay its planned rate hike — which would be good for African currencies and keep the cost of borrowing low.

Lastly, for geopolitical reasons I don’t see China rapidly reducing its footprint on the Continent. In any case, as Howard French makes clear in his latest book, there is a fair bit of (unofficial) private Chinese investment in Africa. Turmoil back home may incentivize these entrepreneurs to plant even deeper roots in Africa and expatriate less of their profits. The net result will be slower growth in Africa. And like in China, slower growth will challenge prevailing political bargains in democracies and autocracies alike.

The 1980s are calling. According to Bloomberg:

Zambia’s kwacha fell the most on record after Moody’s Investors Service cut the credit rating of Africa’s second-biggest copper producer, a move the government rejected and told investors to ignore…..

Zambia’s economy faces “a perfect storm” of plunging prices for the copper it relies on for 70 percent of export earnings at the same time as its worst power shortage, Ronak Gopaldas, a credit risk analyst at Rand Merchant Bank in Johannesburg, said by phone. Growth will slow to 3.4 percent in 2015, missing the government’s revised target of 5 percent, Barclays Plc said in a note last week. That would be the most sluggish pace since 2001.

The looming debt crisis will hit Zambia and other commodity exporters hard. As I noted two years ago, the vast majority of the African countries that have floated dollar-denominated bonds are heavily dependent on commodity exports. Many of them are already experiencing fiscal blues on account of the global commodity slump (see for example Angola, Zambia and Ghana). This will probably get worse. And the double whammy of plummeting currencies and reduced commodity exports will increase the real cost of external debt (on top of fueling domestic inflation). I do not envy African central bankers.

Making sure that the looming debt crises do not result in a disastrous retrenchment of the state in Africa, like happened in the 1980s and 1990s, is perhaps the biggest development challenge of our time. Too bad all the attention within the development community is focused elsewhere.

The FT reports: 

The future of a secretive Hong Kong-based business network at the heart of China’s advance into Africa has been thrown into doubt after reports that its frontman, a jet-setting tycoon with seven names and ties to the intelligence services, has been caught up in a Communist party investigation.

Mr Pa’s detention came a day after Chinese state media announced that Su Shulin, the governor of Fujian Province and a former chairman of state-owned oil group Sinopec, had been placed under investigation for “suspected serious disciplinary offences” by the ruling party’s anti-graft body.

Mr. Pa was the main focus of a May 2015 US military report on predatory investments in the Continent’s extractive sector. It will be interesting to see if Pa’s arrest has any tangible effect on Chinese dealings with the handful of economically opaque dictatorial regimes on the Continent (esp Angola).

According to the IMF:

The oil price shock is adversely impacting the economy. Angola’s oil basket is projected to average US$53 per bbl in 2015, from slightly over US$100 per bbl in 2014, leading to large declines in fiscal revenue and exports. While oil production has recovered following the completion of maintenance work, non-oil GDP growth is expected to decelerate to 2.1 percent in 2015. The industrial, construction and services sectors are adjusting to the decline in private consumption and public investment and lingering difficulties to obtain foreign currency. Inflation is projected to reach close to 14 percent by end-2015, exceeding the National Bank of Angola (BNA)’s 7-9 percent objective. The 2015 budget will allow the central government deficit to fall to 3.5 percent of GDP, compared to 6.4 percent last year. Public debt, however, is projected to increase significantly to 57.4 percent of GDP, of which 14.7 percent of GDP corresponds to the state-owned oil company Sonangol, by end-2015. The external current account deficit is expected to reach 7.6 percent of GDP in 2015; and international reserves to drop to US$22.3 billion (about 7 months of 2016 imports) by end-2015. Meanwhile, a wide spread emerged between the parallel and primary market exchange rates, pointing to an imbalance in the foreign exchange market.

The economic situation in 2016 is likely to remain challenging as international oil prices are not expected to recover and risks are on the downside. Growth is projected to remain stable at 3.5 percent in 2016, with the oil sector growing by about 4 percent. The non-oil sector is expected to show a small improvement, growing by 3.4 percent year-on-year, driven mainly by a stronger recovery in agriculture. Inflation is projected to slow to 13 percent at end-2016, as the effect of the recent monetary tightening is expected to be felt more clearly in the second half of 2016.

More on this here.

The Guardian has an excellent summary of what you need to know about the Panama Papers, the data leak of the century from the Panama-based law firm Mossack Fonseca.The firms specializes, among other things, in incorporating companies in offshore jurisdictions that guarantee secrecy of ownership.

Here is a map of the companies and clients mentioned in the leaked documents (source). Apparently, the entire haul (2.6 terabytes of data) has information on 214,000 shell companies spanning the period between 1970 to 2016.

The leaked documents show links to 72 current or former heads of state and government. So far the highest-ranking public official most likely to resign as a result  of the leak is the Prime Minister of Iceland, Sigmundur Gunnlaugsson (see story here and here)

For a list of African public officials mentioned in the leaked documents see here. And I am sure we are going to hear a lot about all these rich people in developing countries.

Closer to home, the Daily Nation reports that Kenya’s Deputy Chief Justice, Kalpana Rawal, “has been linked to a string of shell companies registered in a notorious Caribbean tax haven popular with tax dodgers, dictators and drug dealers.” Justice Rawal has been dodging retirement for a while. May be after the latest revelations might find a reason to call it quits.

The ICIJ website has neat figures summarizing some of the findings from the massive data haul. Also, here is a Bloomberg story on the tax haven that is the United States. 

This is from the Economist:

This week the “Pension Fund Global” was worth Nkr7.3 trillion ($882 billion), more than double national GDP. No sovereign-wealth fund is bigger (see chart). It owns over 2% of all listed shares in Europe and over 1% globally. Its largest holdings are in Alphabet, Apple, Microsoft and Nestlé, among 9,000-odd firms in 78 countries.

In designing the fund, Norway got a lot right. Its independence is not constitutionally guaranteed, but it is protected as a separate unit within the central bank, overseen by the finance ministry and monitored by parliament. It is run frugally and transparently; every investment it makes is detailed online.

Other funds might copy those structures, but would struggle to mimic the Nordic values that underpin them. Yngve Slyngstad, its boss, says growth came “faster than anyone had envisaged”, and that a culture of political trust made it uncontroversial to save as much as possible. A budgetary rule stops the government from drawing down more than the fund’s expected annual returns (set at 4% a year). The capital, in theory, is never touched. Martin Skancke, who used to oversee the fund’s operations from the finance ministry, attributes the trust the institution enjoys to relatively high levels of equality and cultural homogeneity. It also helps that many rural areas recall poverty just two generations ago.

Consider this your regular reminder that the “resource curse” is not a universal phenomenon. See also Botswana, the United States, Chile, Canada, and Australia.

More on this here.

This is from the IMF’s Monique Newiak:

In summary:

Non-commodity exporters, around half of the countries in the region, continue to perform well with growth levels at 4 percent or more. Those countries benefit from lower oil import prices, improvements in their business environments, and strong infrastructure investment. Countries such as Côte d’Ivoire, Ethiopia, Senegal, and Tanzania are expected to continue to grow at more than 6 percent for the next couple of years.

Most commodity exporters, however, are under severe economic strain. This is particularly the case for oil exporters like Angola, Nigeria, and five of the six countries from the Central African Economic and Monetary Union, whose near-term prospects have worsened significantly in recent months despite the modest uptick in oil prices. In these countries, repercussions from the initial shock are now spreading beyond the oil-related sectors to the entire economy, and the slowdown risks becoming deeply entrenched.

It should be obvious, but it bears repeating that there is quite a bit of variation in economic performance across the 55 states on this vast continent.

My personal Africa growth index consists of Senegal, Cote d’Ivoire, Nigeria, Ghana, Gabon, Cameroon, Ethiopia, Kenya, Zambia, Angola, and South Africa. And despite ongoing turbulence in a number of the key economies in this basket, I am confident that the turbulence will not completely erase the gains of the last two decades.